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Foreclosures and Modifications

William T. Tanner

Patrick Ulibarri

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How did we get here? Loan Origination

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Payment Options

Option #1

30 yr fixed

5.875% P/I:

$2,366

Option #2

30 yr fixed 10yr I/O

6.125% I/O

$2,041

Option #3

12-MTA Option Arm

1% Minimum $1,286

Index 3.58 / Margin 3.25

6.83% Fully Indexed/ I/O Payment $2,273

(Neg Payment - $987)

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Index

3.58 Index

+3.25 Margin

6.83 Fully Indexed

Index Margin

Treasury + 3.25 = rate

LIBOR + 3.25 = rate

Prime Rate + Margin = rate(Fed funds rate + 3%)

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Different loan programsby documentation

Full Documentation “Full Doc”

Limited Stated “SIVA”

Stated Income Stated Assets “SISA”

No Income No Assets “NINA”

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What can a borrower do?

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Questions to Borrower

• Do you wan to stay & should you stay?

• Can you afford to stay? (DTI 31%)

• Value of property v. encumberances-BPO

• Notice of Default or sale – If same postponed lender does not give

another notice

• Current or late payments

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What it used to be

• Skip a few payments (re-capitalize)

• Forbearance (increase payment to make up past due payments)

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What it is now

• Still forbearance & missing payment

• Rate reduction / step rate

• Increasing amortization term

• Reducing the principle balance

Real or window dressing?

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Write downs will be necessary

• “Servicers should also be more aggressive about writing down principal amounts when necessary to make the loan affordable.”

Sheila Bair

FDIC Chairman 2/26/08

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Fixing a mess…

"Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes.”

Sheila Bair

FDIC / IndyMac

8/20/08

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Who owns the loan?

• Probably not who you are making the payment to - they are the Servicing Co

• In most cases some entity on Wall Street

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HAMPHome Affordable Modification Program

Making Home Affordable (MHA)If a servicer took TARPII funds from Treasury they are required to actively pursue modifications under the terms of HAMP/MHA in coordination with the investor who owned the loan.

If the loans are owned by Fannie/Freddie they automatically eligible.

If the homeowner does not qualify for HAMP/MHA the servicer must try to qualify the homeowner for the servicers own in-house modification programs.

(FHA/VA must be first turned down for in-house modification before they can be considered eligible for HAMP/MHA)

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The Obama PlanMaking Home Affordable Modification Plan

• Gross Wages

• 31% - 38% Housing Ratio (PITIA)

• Drop rate .125% to a floor of 2%

• Extend Amortization (up to 480 mos)

• Forebear Principle to end of loan @ 0%

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Who Qualifies

• Primary Residence

• No more than $729,750 Loan Amount

• Have a Hardship

• 1st TD PITIA More Than 31% of Gross Income

• Loan was finalized before 01/01/2009

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• 15 U.S.C. §1641(f)(2) request

• Sup. Dir. 10-02, after June 1, 2010, servicers must provide Fannie Mae with a list of investors who are not participating

• Fannie, Freddie, VA or FHA loan

Who is the investor?

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Who is the investor? (part 2)

• 1641 does not provide a timeline and no cases yet.

• TILA 1641 g …notice to borrower if owner changes

• Fannie may then know who owns the loan

• Fannie freddie check on line FHA VA too

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Reasonable Efforts?

• Ask servicer what reasonable efforts they’ve taken to get the investor to waive restrictions

• Reasonable efforts are required by Sup. Dir. 09-01, p.1

• Under Sup. Dir. 10-02, effective 6/1/2010, server must write to investor requiring waiver at east once

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Inadequate Response?

• Servicer’s in-house escalation team

• E-mail escalations@hmpadmin.com

• Ask for Ken Hannold if escalations are satisfactory

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HAMP second lien program

• Wells, B of A, Chase and Citigroup have signed onto this program

• Just recently

• We don’t know the specifics yet

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HAMP Second Lien Program

• Resolutions

• Dismissal of foreclosure

• NPV test not require

• Required standard modification steps or extinguishment

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HAMP 2nd Lien Program

• 09-05r revised directive• Requires resubordination by second• If first mods then second must dismiss

foreclosure• No NPV on second• Standard mod steps-capitalization, Rate red

(step increases), increase payback, forbear (if first forbear then second must in same amount)

• Waive late fees and other fees

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Short Sales

• What is a short sale?

• Why would someone want

• to short sale their house?

• Credit issues– Short Sale vs. Foreclosure?

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HAFA Short Sale ProgramHome Affordable Finance Program• $3K relocation

• $1.5K to servicer for admin costs

• $6k (max.) to junior lienholder

• Up to $2,000 for investors who allow a total of up to $6,000 in short sale proceeds to be distributed to subordinate lien holders, on a one-for-three matching basis.

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Foreclosure

• Judicial– Breach of Contract

1. File lawsuit

2. Wait for Trial

3. Trial

4. Sheriff’s Sale

• Not very popular

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Foreclosure

• Non judicial– Deed of Trust

1. Record Notice of Default

2. Wait Statutory Period

3. Publish Notice of Sale

4. Sale

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Civil Code Sec. 2923.5 (2008)

• Loans 1/03-12/31/08• Lender must contact borrower• Must wait 30 days to file NOD• HO has right to meeting within 14 days

and HUD counselling• Statute has special methods of contact• NOD must state lender has complied• Also owner must maintain property

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California Civil Code 2923.6 (2008)

• Appeared to create an obligation of servicers to offer modification

• The terms basically mirrored the Obama plan.

• Cases on appeal-only one case where Judge found a right to stay foreclosure

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Income Taxes - Fed• The Mortgage Forgiveness Debt Relief Act and Debt Cancellation •  If you owe a debt to someone else and they cancel or forgive that debt, the

canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

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Income Taxes - CA

• Mortgage Forgiveness Debt Relief Extended - Updated 04/13/10

• On April 12, 2010, SB 401, the Conformity Act of 2010 was enacted. It allows taxpayers who had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from California gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before

January 1, 2013.

http://www.ftb.ca.gov/aboutFTB/Newsroom/Mortgage_Debt_Relief_Law.shtml

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William T. TannerLegal Aid Society of Orange County

714-571-5204btanner@legal-aid.com

Patrick UlibarriLaw Offices of Sanford Parke

714-740-8009patu@parkelawgroup.com

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• The following slides were intentionally provided. They include graphs that help show the dire circumstances of the current housing market.

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